Management Essay

LEGO WORKING WITH STRATEGY AND THE GLOBAL PHARMACEUTICAL INDUSTRY

Contents

TASK 1. 2

1.      What features of the external environment have influenced strategy development at the LEGO Group?. 2

2.      What resources and competences of the LEGO Group have enabled them to regain their successful position in the global toy market?. 3

3.      What were the alternative strategies facing the LEGO Group in 2004? Why do you think the LEGO Group followed the course that they did?. 4

4.      Discuss the extent to which you consider LEGO to be a strategy-oriented organization. 6

1.      Identify the main environmental forces currently affecting the global pharmaceutical industry. 8

2.      How relevant do you think the Five-Forces Framework map is to identify environmental forces affecting the global pharmaceutical industry? Do these forces differ by industry sector, and where would you place the different sectors in the industry life-cycl?. 9

3.      Identify the strategic groups within the global ethical pharmaceutical industry. Describe the strategic choices made by Pfizer from 2008 onwards and comment on what may have been the drivers behind these choices. 12

4.      Research, compare and contrast the activities of leading industry players in either China or India. 13

TASK 1

1.     What features of the external environment have influenced strategy development at the LEGO Group?

The LEGO Group has been influenced a lot by the external environment in terms of strategy development. One of the features of the external environment is the introduction of plastic toys. In 1949, LEGO started using plastic bricks. Since its establishment, the company had been relying on wooden materials to manufacture toys. Many people were hesitant to accept plastic because it was a new material.

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            Another feature of external environment was the hostile environment of the 1970s and 1980s because of the oil crisis. This crisis led to a slow-down in the global economy. To adapt to this environment LEGO had to introduce innovative products as well as venture into new markets in South America, the US, and Asia (Johnson, 2011). The company also had to adopt a strong development strategy, which necessitated the hiring of 5000 new employees (Johnson, 2011).

            The external environment changed once again during the mid-1990s because of international competition. The main competitors who emerged during this time include Nintendo, Sony, Visual Arts, and Activision. This competition prompted the company to explain that the crisis it went through between 1999 and 2003 was caused by a rapidly changing external environment.

            The LEGO Group has also been operating in an environment where the needs of customers are very sensitive. It takes a lot of time to determine which products will be accepted by customers. This challenge has created a situation in which the company’s new product  releases are few, weak, and far between. The company has also been facing pressure from its main retail customers such as Wal-Mart. These retailers expressed concerns about business continuity following negative reports about LEGO’s financial performance in the media. Lastly, LEGO continues to face the challenge of releasing products that are compatible with the “new” media. A major challenge in this case is on how to maintain a balance between the need for brand image that is based on old media and its desire to introduce a digital strategy.

2.     What resources and competences of the LEGO Group have enabled them to regain their successful position in the global toy market?

One of the resources that have enabled the LEGO Group to move back on the path of growth is its brand strength. The company has managed to build a strong brand during its decades-long existence. Today, LEGO is the world’s fifth largest global toy companies. Moreover, the company has a high market share in many parts of the world. This has created numerous marketing opportunities. The company regained its foothold on the global toy market because of its decision to exploit most of these opportunities.

The company also had the option of selling those subsidiaries whose business model deviated from LEGO’s mainstream corporate strategy. For example, in new LEGOLAND parks, it was difficult to introduce new activities because of the long lead times accompanying such efforts. By selling such businesses, the company was able to regain its financial strength, thereby enabling it to face more business risks in the context of a new business strategy. Without such assets, LEGO may have been compelled to sell its business.

The company has also come to attach a lot of value to its experienced employees because of their understanding of the highly seasonal supply chain that is the hallmark of LEGO’s growing sales. Because of the experience of these employees, the company is able to move its sales through big retailers such as Wal-Mart and KMART. Since almost a half of the company’s products are sold during the Christmas season, forecasting can be very difficult. This is where employees’ personal experience comes in.

Moreover, LEGO also benefited a lot from effective leadership, strong presence in the international market, and innovative products. Strong leadership is evident in the decisions that Kjeld Christiansen has been making to save the company from collapsing. For example, he was at the forefront in the company’s decentralization strategy. In 2004, he chose to hand over the position of CEO to his Vice President, 35-year-old Jorgen Vig Knudstorp. This decision triggered media speculation about the young age of the CEO and the possibility that he would fail in overseeing LEGO’s turnaround.

Through its presence in the international market, the LEGO Group gained a lot of experience in handling business operations in different cultures. This competency was important in enabling the company decide to transfer its outsourcing operations from high-cost to low-cost countries in order to maximize profits. Moreover, the experience obtained during international operations prompted the company to change its supply chain philosophy. In 2008, the company felt that it was better to oversee its global manufacturing operations in order to achieve a greater level of effectiveness. The resulting cancellation of an outsourcing partnership with Flextronics was cancelled, and layoffs in Denmark were avoided.

3.     What were the alternative strategies facing the LEGO Group in 2004? Why do you think the LEGO Group followed the course that they did?

The LEGO Group faced several alternative strategies in 2004. First, it could have decided to increase the number of new, stronger, product launches. The company could have chosen to continue building on the successful launches of Star Wars and Harry Potter. Unfortunately, this strategy depended on continued release of new, highly successful movies. In the absence of new movies in 2003, the company was faced with the need to introduce new products for small children based on past success. However, this was also a risky option because it would be difficult for customers to approve of a new product being presented as a replacement for a successful movie like Harry Potter. In this case, the company needed to adjust its inventory levels to pave way for new LEGO supplies.

The company also faced the choice of retaining its existing workforce. By avoiding layoffs, LEGO would have succeeded in sending a strong signal about its commitment to stand by its loyal, long-serving workforce. However, for a company that was trying to gain a new beginning, this was not a viable strategy. The very survival of the company was under threat. Therefore, it did not make much sense for a CEO to try to put the welfare of the employees before that of the company they worked for. Similarly, the CEO could have opted to refrain from instigating heavy write-offs on some of the company’s assets including LEGOLAND parks. Such a decision meant that the company would continue operating from a position of financial weakness.

The handover of leadership to a younger CEO was another major strategic option. It seems that Kjeld handed over leadership at the time when the company needed him most. One would have expected Kjeld to oversee the launch of the new beginning before handing over the mantle to the Jorgen Vig Knudstorp. It is risky for a company that is struggling to facilitate a leadership takeover to an inexperienced CEO at a time when a major strategic realignment is about to take place. For the sake of long-term success, it would have been better for Kjeld to continue operating as LEGO’s CEO.

The decision by the company to strengthen its capital structure may have been undertaken to enable it increase the number of strong product releases and to do so more frequently. I think LEGO adopted this move as a strategic risk-taking move to enable it shake up the market, provide new direction in innovation, and achieve market leadership in the long run. In my view, the Kjeld must have argued that he had to make a choice between selling the company and making some risky choices in the pursuit of as many business opportunities as possible. In my view, Kjeld was keen to exploit LEGO’s unique positioning as a custodian of classical play themes while at the same time updating the overall concept all the time. This way, the company stood a good chance of retaining its enthusiastic users as well as attracting new ones.

4.     Discuss the extent to which you consider LEGO to be a strategy-oriented organization.

            Since its establishment, LEGO has stood out as one of the leading toy companies in the world.During its formative years, the company was largely driven by strategy. However, it later on got carried away by strategic uncertainty. This strategic uncertainty was responsible for its poor performance during the 1980s and 1990s. Although the LEGO Group is now headed towards rapid growth, it is yet to establish a strong footing as far as strategic orientation is concerned. A clear-cut organizational strategy is yet to emerge. Therefore, the growth in sales and profits being reported in recent times may not be sustainable. In the long run, the company will be compelled to settle for a strategy that defines its approach to issues of management, innovation, product development, outsourcing, marketing, and international operations.

So far, it seems that the recovery process of the company is based on trial and error method. Many crucial decisions are being influenced by the Kjeld family. Yet this family does not have a preferred business model in mind as far as the long-term survival of the LEGO Group is concerned. This phenomenon has led to numerous operational lapses that may have given international competitors an opportunity to capture some of the company’s crucial markets. This problem is common among family-owned businesses. They start operations on a successful note before losing track of strategic direction because of instability in the external business environment both locally and internationally. After being threatened with an imminent collapse, these companies are normally compelled to change tact by adopting a new, sustainable business strategy. The founding family of the LEGO Group is yet to identify such a strategy. Therefore, it may not qualify to be referred to as a strategy-oriented organization.

A number of factors may have contributed to failure by LEGO’s leaders to adopt a coherent, well-defined strategy. One of them is the nature of its business. The toy business is highly season, with about half of the industry’s annual sales being made during the Christmas season. At the same time, the product development process is lengthy, complex, and highly sensitive. At LEGO, only one out of fifty product suggestions end up being developed into a sellable product. At the same time, changes in the international business environment are occurring all the time, meaning that the companies operating in this industry are perpetually searching for alternative business models and new areas of diversification.

In 2004, LEGO embarked on an ambitious goal of engineering a corporate turnaround. The company’s leaders toyed with the idea of developing a digital strategy. However, these efforts are not likely to succeed because the new strategy is constantly being postponed apparently with a view to strike a balance between “new” and “old” business. This is an indication that the company is not yet ready to move to a new era of strategy-oriented management and growth. By failing to break away from its unsuccessful past, LEGO’s recent profitability run is likely to be short-lived.

TASK 2

1.     Identify the main environmental forces currently affecting the global pharmaceutical industry

The global pharmaceutical industry is being affected profoundly by a number of environmental forces. One of them is the enactment of legislation that set a fixed period of 20 years on patent protection. After a period of twenty years since the initial filing has lapsed, the patent expires, such that rival companies introduce generic medicines with active ingredients similar to those of the original brand. The greatest challenge is that these generic drugs are provided at lower prices. This law continues to create an ideal environment for the entry of generic drugs into the global market. Once a patent expires, a pharmaceutical company loses a huge proportion of its sales to competitors who rush to cash in on the popularity of generic drugs. This law drastically reduced the period during which companies could recoup research and development (R&D) costs.

            Another environmental force is the government. In many countries, the national governments often take the positions of powerful, single purchasers, thereby creating a phenomenon of “monopsony”. This situation has led governments around the globe to target pharmaceuticals for political reasons mainly through the introduction of reimbursement or price controls. In most cases, the industry is unable to mobilize political support to deal with these problems. Price controls have created the problem of “parallel trade”, whereby distributors can freely obtain drugs from low-price markets and then sell them to high-price markets in order to make huge profits. Parallel trade is prevalent in Europe and Asia.

            Another environmental force is the emergence of small and medium-sized biotechnology start-ups. These firms are being supported by venture capitalists with a view to exploit the numerous opportunities arising in genetic engineering and molecular biology. However, these startups have in recent years been experiencing numerous problems arising from long cycles of product development. This means that the pharmaceutical firms have to wait for many years to earn profits.

2.     How relevant do you think the Five-Forces Framework map is to identify environmental forces affecting the global pharmaceutical industry? Do these forces differ by industry sector, and where would you place the different sectors in the industry life-cycle?

            The Five-Forces Framework map is of utmost relevance in identifying the environmental forces affecting the global pharmaceutical industry. In this framework map, the first force is rivalry. The element of rivalry can be used to explain the existence of a number of environmental forces in the industry. For example, the emergence of generic drugs has greatly contributed to rivalry among pharmaceutical companies. Following the enactment of a law that puts an expiry period for patents, rival companies are literally taking over the production and sale of drugs whose patents have expired. This is because they are able to offer these drugs to customers at lower prices, thereby driving customers away from the companies that first developed them.

            Rivalry is also evident in the way biotechnology start-ups have been emerging in recent years. These small firms largely operate with the support of venture capital. To reduce competition, established pharmaceutical companies have started seeking to form mergers and acquisitions with these small firms. The same case applies to the vaccines sector, where rivalry is high. This rivalry is attributed to the emergence of vaccines as a crucial revenue generator. Although entry barriers exist, it is expected that industry rivalry will continue playing out in the foreseeable future.

            The second force is threat of substitutes. Substitutes are the products that can serve the same purpose only that they are being provided by other industries. In the pharmaceutical industry, a medium threat of substitute may be said to exist. Once patents run out, rival companies rush in to introduce generic branded drugs. In the US, efficiency in manufacturing and distribution remains a crucial driver of success for manufacturers of generic drugs. Many manufacturers of generic drugs mastered these requirements during the 1990s, leading to severe attacks on branded drugs. This triggered a wave of patent disputes. However, with finances to support these disputes and economies of scale, the top ten generic firms were able to take up nearly half of the global pharmaceutical market. Alternative medicines also pose a threat especially in eastern countries.

            The third force in the Five Forces Framework is buyer power. Buyer power is a relevant element in efforts to identify the environmental forces that continue to influence operations in the industry. Buyer power essentially entails the impact of customers on the producing industry. In the pharmaceutical industry, buyer power is very strong. This is primarily because in every country, the state takes up the position of the single, most powerful buyer, thereby leading to the emergence of monopsony. Monopsony is characterized by a situation where many suppliers compete for only one buyer. In such situations, the buyer is able to set the price. In the pharmaceutical industry, countries are using their buyer power to gain political mileage through their choice of drug companies and the terms of trade that they impose. However, this buyer power seems to vary from one sector to the other. The buyer power is strongest in the prescription-only sector. In terms of value, these drugs contribute 85 percent of the global pharmaceutical market. In terms of volume, they take up 50 percent of the market.

            Supplier power is also relevant in facilitating the process of identifying environmental forces in the industry. Every industry must work with suppliers of raw materials, components, labor, and logistical support. If suppliers turn out to be powerful, they may exert some influence on the industry. For example, they may sell raw materials at high prices, thereby capturing some of the profits of the industry. In the pharmaceutical industry, supplier power is very high. Few suppliers meet the strict guidelines provided by governments and regulators. The few suppliers who survive the stringent assessment processes tend to be very assertive. They greatly influence the ability by pharmaceutical firms to engage in R&D.

Lastly, entry barriers constitute a major force that greatly facilitates a better understanding of the environmental forces that exist in the industry. Entry barriers vary from one sector to the other. For example, the threat of new entrants is lower in the biologics sector than in other sectors. This is because of superior pricing as well as low attrition. These two factors reduce the risk of entry by manufacturers of generic drugs. Another entry barrier is posed by the costly, sophisticated capabilities that companies must put in place before they can start developing complex biosimilar products. However, a major entry barrier was removed with the enactment of a law that imposed expiry dates on patents. This paved the way for the entry of generic drugs into the international market.

In terms of industry life-cycle, I think both the prescription-only and over-the-counter sectors are at the maturity stage. These sectors have already gone through the R&D stage and the growth stage. In the latter stage, they have continued to encounter immense competition from generic drugs. However, I would place biologics in the growth stage. This is because the idea of biologics has already been fronted, many R&D efforts have been made, and the next step is for competitors to emerge as part of the growth process. Lastly, in the vaccines sector, most products are approaching the maturity stage. Mass production of vaccines has facilitated efforts to prevent at least three million deaths every year worldwide (Johnson, 2011).

3.     Identify the strategic groups within the global ethical pharmaceutical industry. Describe the strategic choices made by Pfizer from 2008 onwards and comment on what may have been the drivers behind these choices.

             Strategic groups are groups of companies that use similar strategies in their operations within an industry. It is possible for these companies to be categorized into sub-groups depending on the strategies that they use. The sub-groups exhibit similar behavior along crucial strategic dimensions. They also confront similar opportunities and threats in the market. Moreover, they use similar protective barriers to ward off threats posed by new entrants.

In the ethical pharmaceutical industry, focus is on prescription-only drugs. One of the main strategic groups comprises of companies that use pricing strategies to maintain a competitive edge. Through transfer pricing, these companies ensure that they are able to receive adequate return on their investment within a reasonable period. At the same time, there is always a need to ensure that all respective parties also receive return on their investments. In most cases, patent-protected products are sold in large quantities to a large international market in order to maximize returns.

Another strategic group focuses on R&D, thereby contributing to the areas of diagnosis, cure, prevention, and management of diseases. From the point of view of the public, this strategic group is perceived to be greatly involved in diagnostic processes as well as mainstream medicine. This strategic group easily attracts partnerships with multinational pharmaceutical companies as well as nongovernmental organizations.

One of the strategic choices that Pfizer Pharmaceuticals made from 2008 onwards is an attempt to introduce a new drug to replace Lipitor, whose patent was set to expire. The decision to undertake clinical testing for this new drug may have been driven by prospects of a successful drug launch similar to that of Lipitor. Another strategic choice was that of introducing a broad “pipeline of new prescription-only drugs” while at the same time maintaining a strong cash reserve. This decision seems to be a knee-jerk reaction to the expiry of Lipitor’s patent. It is aimed at ensuring that Pfizer stays afloat as it searches for new partnerships with other pharmaceutical companies. The objective is for the company to install a substitute to its blockbuster business model. The company’s managers seem to have realized that this model is highly likely fail in today’s environment of declining R&D productivity and increased regulatory scrutiny.

4.     Research, compare and contrast the activities of leading industry players in either China or India.

            The Indian pharmaceutical industry is poised to become a major global force in the foreseeable future. This phenomenon has been contributed to by the ongoing global shift towards emerging markets in Asia. One of the defining characteristics of the Indian industry is that the market is highly fragmented. By 2009, more than 10,000 firms were operating in the market, 200 of which controlled 70 percent of the market share. Moreover, a majority of the top ten players in this market have in recent years been growing rapidly. The largest market share is held by Cipla, followed by Ranbaxy. Cipla has a 5.2 percent share while Ranbaxy has a 4.7 percent share. The other leading pharmaceutical companies in India include GSK India, Sun Pharma, Piramal Healthcare, Alkem Labs, Zydus Cadila, Mankind Pharma, Pfizer India, and Abbot.

            In the investment front, a lot has been happening in the industry since 2008. For instance, Ranbaxy was acquired for $4.6 billion by Daiichi Sankyo, a Japanese drug maker. In 2010, Piramal Healthcare was bought by Abbot for $3.7 billion. Moreover, long-term supply partnerships are increasingly being forged between generic producers and innovators in India. Examples include deals between Aurobindo and Pfizer as well as between GSK India and Dr. Reddy’s Labs. This trend is expected to continue in the next few years largely because many drugs will have gone off-patent.

            Indian industry players are also preoccupied with branded generics. Some of the companies that supply the leading branded generics include Pfizer, Novartis, Piramal Healthcare, SSK, FDC, Ranbaxy, and Aristo Pharma. The brands of the leading companies are often synonymous with quality. This means that the leading brands tend to dominate the market. They also tend to command large price premiums. Some of the innovator brands with a large premium price include Johnson & Johnson, Cipla, Sanofi Aventis, Zydus, Pfizer, and Intas Pharma.

References

Johnson, A 2011, The LEGO group: Working with strategy, Routledge, London.

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